Market Update: Thursday, October 25, 2018

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Daily Insights

  • Key Insight: As we noted at the end of last year in our Outlook 2018*, we’ve been expecting a meaningful pickup in volatility, particularly after the unusually benign conditions that characterized 2017. This year has not disappointed in that regard as we saw major U.S. indexes fall sharply in February following an unexpected pickup in inflation, and again in March amid a ramp-up in US.-China trade tensions. However, stocks recouped the losses in both instances once investors refocused on fundamentals, namely economic growth and corporate profits, both of which remain quite strong and are expected to continue to provide tailwinds in 2019.

  • There are market indicators flashing bearish signals (see below), housing and autos are weakening, and we may have seen a peak in corporate earnings growth. While we are monitoring these and other data very closely, the reality is that recessions have historically lagged a peak in earnings growth by more than 48 months. Also, the impact of fiscal stimulus (tax cuts, increased federal spending, repatriation of overseas profits) is likely to outweigh the negative impact of tariffs by a factor of five, U.S. economic growth next year is likely to come in around 2.5%, and corporate profits may grow near 10% (Thomson consensus), all of which underpin a still very healthy environment for investors. Add to that our expectation that the Federal Reserve may be less aggressive with its rate-hike campaign next year than what investors currently expect, and you could likely see valuation support for equities as the rate used to discount stocks shifts lower (boosting present values) and stocks become more competitively priced relative to bonds.

  • S&P 500 drops into negative territory for the year. Following yesterday’s more than 3% drop, the S&P 500 Index is now in negative territory for the year on a price return basis (though still positive on a total return basis). The late-day surge lower began to show the signs of fear among investors that are typically necessary for correction lows, notably a spike in the put/call ratio and the VIX closing at its highest level since February. With the index now roughly 4% below its 200-day moving average at 2656, we look towards key support levels at 2595 and 2532, representing the May and February lows, respectively. Despite some signs of panic, there were some internal positives relative the month’s earlier lows, including breadth at -5:1 versus -11:1 on October 10, and the percent of stocks trading at 20-day lows reaching just 51% versus 76%.

  • ECB begins tapering, holds rates. This morning, the European Central Bank (ECB) announced it would decrease bond purchases to 15 billion euros through December, and will decide to end its bond-buying program at the end of the year based on incoming data and the outlook for inflation. The ECB also left benchmark rates unchanged and reiterated that it will likely leave rates at these levels through summer of next year. European stocks rose modestly on the news, as the ECB’s outcomes were widely expected. Even as the ECB moves away from Quantitative Easing, we remain less optimistic on Europe’s economic growth prospects (relative to its developed-market peers) as the region struggles with disappointing economic reports, trade tensions, and political dissonance.

  • October’s rough ride. October has been a rough month for U.S. equities. The S&P 500 is down 8.8% month to date, poised for the worst month since February 2009 and the worst October since 2008. On today’s LPL Research blog post, available now, we’ll outline five takeaways from the recent volatility, and highlight why the stage could be set for a month-end rally.

  • LPL Market Signals Podcast. In the latest episode of the Market Signals Podcast, listen to Equity Strategist & Portfolio Manager Jeffrey Buchbinder and Chief Investment Strategist John Lynch discuss the signs pointing to economic growth in the third quarter and into 2019. Market Signals by LPL Financial is now available on iTunes, Google Play and Spotify. Please join our discussion on social via #LPLMarketSignals.

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Thursday

Friday

  • GDP Report (QoQ, 3Q)
  • Core PCE (QoQ, 3Q)


IMPORTANT DISCLOSURES

*For additional disclosure, please see the Outlook 2018: Return of the Business Cycle publication

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Index data obtained via FactSet

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